Nordic Credit Rating said today that it had assigned a 'A-' long-term issuer rating to Norway-based Melhus Sparebank (MelhusBanken). The outlook is stable. An 'N2' short-term issuer rating was also assigned, together with a 'A-' senior unsecured issue rating, a 'BBB+' Tier 2 issue rating and a 'BBB-' additional Tier 1 issue rating.
Rating rationale
The long-term issuer rating reflects Melhusbanken's robust capital position, low risk appetite, and strong earnings. The bank has a cooperation agreement with the Eika banking alliance, which we view as positive, as it provides product diversity, shared development costs, and the opportunity to finance residential retail mortgages through mortgage company Eika Boligkreditt. We expect strong cost efficiency to support the bank's core earnings despite a likely decline in net interest margins over the next few years. We also expect robust pre-provision profit to offset elevated loan losses due to a slowdown in the overall economy.
The rating is constrained by the bank's concentrated exposure to real estate in the municipalities of Melhus and Trondheim in central Norway. It is also constrained by strong competition in its core market and its low market share in the larger municipality of Trondheim.
Stable outlook
The stable outlook reflects our view that a weak economic climate and projected credit losses will be offset by improvements in capital and strong earnings metrics. We believe the bank's low risk appetite, strong real-estate collateral, improved earnings, and stable cost position will enable resilience to a moderate slowdown in the economy. We expect MelhusBanken's capital ratios to be further boosted by the prospective positive impact of implementing the EU's Capital Requirements Regulations III.
We could raise the rating to reflect a consolidated Tier 1 ratio sustainably above 25%, pre-provision income to risk exposure amount sustainably above 3%, and reduced uncertainty about credit risk together with improved asset quality metrics.
We could lower the rating to reflect a material deterioration in the local operating environment that negatively affects asset quality, a lasting reduction in the Tier 1 capital ratio to below 20%, or risk-adjusted earnings metrics below 2% of risk exposure amount or cost/income above 50% over a protracted period.
| Rating list | Rating |
|---|---|
| Long-term issuer credit rating: | A- |
| Outlook: | Stable |
| Short-term issuer credit rating: | N2 |
| Senior unsecured issue rating: | A- |
| Tier 2 issue rating: | BBB+ |
| Additional Tier 1 issue rating: | BBB- |
Contacts:
Geir Kristiansen, analyst, +4790784593, geir.kristiansen@nordiccreditrating.com
Ylva Forsberg, analyst, +46768806742, ylva.forsberg@nordiccreditrating.com
Sean Cotten, chief rating officer, +46735600337, sean.cotten@nordiccreditrating.com
The methodology documents used for this rating are NCR's Financial Institutions Rating Methodology published on 14 Feb. 2024, NCR's Rating Principles published on 14 Feb. 2024 and NCR's Group and Government Support Rating Methodology published on 14 Feb. 2024. For the full regulatory disclaimer please see the rating report.